international analysis and commentary

Post-election India: the new tiger beyond the global downturn

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With great power has come great responsibility. On May 16, 2009, the election results were out in India, the world’s largest democracy. The Congress-led United Progressive Alliance, like a silent tsunami, swamped its rivals to triumphantly return to power. The Indian Stock Market saluted this win. The sensex soared 2111 points, the sharpest one-day rise ever by any index in the world. Within seconds of its opening on May 18, the sensex skyrocketed by 17.3% and trading had to be halted for the day. India’s currency too rose, marking the sharpest increase in 23 years.

It is widely said that the Congress coming to power is a vote for policy reforms, stability and good governance. However, despite these favourable movements, one needs to remember that the Congress has inherited a crown full of thorns. Industrial production is plummeting, exports are shrinking and fiscal deficit is rising. Thus the immediate tasks before the government are many and challenging.

The global economic slump hit the world’s second fastest-growing economy and Asia’s third-largest harder than expected. Growth in India is expected to slow to a seven-year low of about 6% this fiscal year, from about 7% in 2008-2009, and from rates of 9% or more in the previous three years. Millions of jobs have already been lost. Addressing the members of parliament, Indian Prime Minister Dr. Manmohan Singh said, “We have to revive growth and make it more inclusive.” To achieve this, he said, “we must also ensure that we can sustain growth”. Thus it is a time in India when growth, development and sustainability are top priorities for the government. Of immediate concern are job creation, poverty reduction, agricultural revitalization and the acceleration of industrial development. Investment in infrastructure, healthcare and sanitation are other reform priorities. In the near future the government also plans to introduce reforms in the pension and education sectors. Enhancing caps on foreign direct investments (FDIs) in sectors such as retail, insurance and aviation are also on the anvil. Divestment of shares of state-owned enterprises (SOEs) – a policy that was stalled by the allies of the previous coalition government – is also expected to be carried forward.

In order to make growth more inclusive in a country where one third of the population lives in abject poverty, a country which has 60 million malnourished children (40% of the world’s total), providing for food and jobs is imperative. The National Rural Employment Guarantee Act that guarantees a job for 100 days is one such step.  In fact, it is commonly believed that this program was singularly responsible for the victory of Congress in a number of districts where it was launched. The government is sure to expand this program in the coming months. Increases in spending on education, healthcare and rural development are also likely. Providing food grain at a subsidised price to families below the poverty line is another election promise that the Congress is sure to keep. No doubt, such schemes give immediate relief to the poor, but sustaining these programs on a large scale is difficult indeed, given the alarmingly high fiscal deficit (currently running at about 12% of the gross domestic product).

The economic slowdown, by impacting the growth rate, is resulting in lower than expected tax revenues. Further, the crude oil price shock resulted in a highly inflated oil and fertilizer subsidy bill. Also, the Indian government decided to revise the salaries of its employees by a hefty margin at each level, and a massive loan waiver (amounting to almost 1.6% of GDP) was also offered for some 43 million poor farm families. This too put a heavy burden on the exchequer.

On top of all this, in order to counter the economic slowdown, the government came out with two stimulus packages.

Most economists believe that the new government will have to take immediate steps to control the fiscal situation. In fact, the developments in global markets derailed India’s fiscal reform process which was going very smoothly during the past few years.
Undoubtedly, extraordinary circumstances demand extraordinary responses: while acknowledging the gravity of rising fiscal deficits, the leaders of Congress feel that the fiscal deficit is not an immediate concern compared to the pressing need to revive India’s growth rate and to uplift millions of poor living in abject poverty.

The government of course has the option of selling its shareholdings in a number of SOEs as a means to generate quick revenues. With the leftist parties (ideologically opposed to disinvestment) no longer a part of the government, bringing out its disinvestment program from the deep freeze is eagerly looked forward to. The Congress party’s manifesto clearly states that disinvestments will be pursued, though privatization in the form of strategic sales (in sectors such as power and railways) to private parties will not be encouraged. While strategic sales best serve the objective of improvement in firms’ efficiency and revenue maximization for the government, partial divestiture through public offering promotes ‘democratic privatization’. That is, it results in widespread ownership of shares, thereby widening the capital market.

With the global economic picture brightening, projections by the Reserve Bank of India (RBI) – India’s central bank – are also rosy. The Indian economy is now expected to recover from the impact of the financial meltdown by later this year as stability gets restored in world markets. Its governor, Dr. D. Subbarao, stated that India’s lower dependence on merchandise exports, a smoothly functioning financial system, comfortable forex reserves and modest inflation will help achieve a swift recovery from the slowdown. With revival around the corner and a new government without ideological shackles to pursue economic reforms, India is truly poised to be the new Asian tiger.